1©2019, Canadian Tax Foundation Pages 1 – 21

c a n a d i a n

Editor: Alan Macnaughton, University of Waterloo (amacnaughton@uwaterloo.ca)

fo c u st a x Volume 9, Number 2, May 2019

IN THIS ISSUE

Shareholder Loans: Does TOSI Prevent a Deduction on Repayment? 1

Rectification: Where Are We Now? 2

Involving the CRA in Rectification and Declaratory Proceedings 3

Mettre en cause l’ARC dans les recours en rectification et déclaratoire 3

Should Expenses of TCC Judges Be Made Public? Bill C-58 4

Private Foundations: Exceeding the 20 Percent Limit 5

Non-Resident Employees: Withhold on Worldwide Income? 6

Access to Information: CRA Need Not Disclose 6

TCC Curtails SBD Multiplication 7

La CCI freine la multiplication de la déduction accordée aux petites entreprises 8

TCC Finds Lack of Knowledge, Not Misrepresentation 9

Gap in Subsections 40(3.3) and (3.4) for Wound-Up Trust? 9

US Anti-Hybrid Rules Affect Financing Structures 10

Les nouvelles règles anti-hybrides américaines impactent les structures de financement 11

BC Speculation and Vacancy Tax: Surprises for Non-Residents and Trustees 12

Mistaken Overreporting of Income 12

Erreur de surdéclaration du revenu 13

Referring Clients to Other Professionals 14

TCC Refuses To Grant Charter Remedies 14

CRA Cannot Require Oral Interviews 15

Fairness and the Onus of Proof 16

Reaffirming the Sham Doctrine 17

Réaffirmation de la doctrine du trompe-l’œil 17

Credit Card Rewards Not Related to Spending: Taxable? 18

Samaroo: Malicious Prosecution Finding Overturned 19

Affaire Samaroo : Renversement du verdict de poursuites abusives 19

Shareholder Loans: Does TOSI Prevent a Deduction on Repayment?The income inclusion for a shareholder loan under subsection 15(2), which may apply if the loan is not repaid by the date specified in subsection  15(2.6), can normally be offset by a paragraph 20(1)(j) deduction when the loan is repaid after that date. However, under one interpretation of that paragraph,

this deduction would not be available if the shareholder loan is considered split income. Note that paying back the loan within the time permitted under subsection  15(2.6) will avoid the subsection 15(2) inclusion.

Although individual taxpayers who are already paying tax at the highest marginal rate may overlook the TOSI regime, this outcome suggests that TOSI may affect high-rate taxpayers as well. As long as one’s shareholder loan could be caught as split income, whether a person is already paying the high rate of tax is irrelevant—the paragraph 20(1)(j) deduction might not be available.

Consider a shareholder whose circumstances cannot satisfy any of the conditions of the definition of “excluded amount” in subsection 120.4(1). If the shareholder takes a loan from a corporation and does not repay it within the time permitted under subsection 15(2.6), the amount may be taxable under subsection  15(2), and it would be considered split income pursuant to subparagraph  (a)(ii) of the definition of “split income” in subsection 120.4(1), and be subject to tax at the top marginal rate. This subsection 15(2) inclusion is offset by a paragraph  20(1)(ww) deduction for split income, which ensures that split income is effectively taxed only pursuant to subsection 120.4(3).

The question is whether the paragraph 20(1)(j) deduction will be available. A deduction is available for

such part of any loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing the taxpayer’s income for a preceding taxation year (except to the extent that the amount of the loan or indebtedness was deductible from the taxpayer’s income for the purpose of com-puting the taxpayer’s taxable income for that preceding taxation year) [emphasis added].

The issue is the meaning of the italicized phrase providing a carve-out from the deduction: does it refer to division C deductions, or to amounts deductible in computing division B income? Under the first interpretation, the paragraph 20(1)(j) deduction can be taken as usual; but under the second inter-pretation, the paragraph 20(1)(j) deduction is denied, since a deduction has been taken under paragraph 20(1)(ww).

Several arguments support the first interpretation:

• The “from” in the phrase “deductible from the taxpayer’s income” may be taken to suggest that one first calculates division B income, and then subtracts amounts from that in order to arrive at taxable income.

• Subsection 112(1) uses a similar phrasing to provide a division C deduction for certain intercorporate dividends.

• The common way to refer to deductions in computing division B income is different; for example, “in computing a taxpayer’s income” (see, for example, subsections (8)(1) and 20(1)).

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not available to alter a tax-driven corporate transaction by add-ing steps or fundamentally changing the transaction itself.

Relief has been granted to rectify

• a share purchase agreement and related promissory note to avoid a deemed dividend under section 84.1 on the sale of shares to a corporate purchaser by replacing the pur-chaser with an individual and adding an additional step to the transaction (Crean, 2019 BCSC 146);

• a resolution, which incorrectly calculated the capital divi-dend account balance, by reducing the declared capital dividend to avoid the imposition of part III tax (5551928 Manitoba Ltd. (Re), 2018 BCSC 1482); and

• a deed conveying two parcels of land to an individual, by instead transferring one parcel to a corporation owned by the individual in order to avoid a tax assessment relat-ing to that individual’s shareholder loan account (Buyting, 2017 NBQB 190).

The successful applicants in these cases were able to point to one or more documents that demonstrated a clear tax strat-egy. In Crean, an agreement in principle entered into by the purchaser and vendor revealed the parties’ intention to exe-cute a direct sale, and an intervening step to the transaction was added by the court to give full effect to this agreement. In Manitoba, the directors’ resolution authorizing the capital dividend showed a specific intention to return capital to share-holders and deplete the capital dividend account. Finally, in Buyting the applicant provided faxes from an accountant to a lawyer with clear instructions for the transfer of one parcel to the corporation.

Despite these successes, provincial courts have shown a general reluctance to grant rectification where the effect of the relief sought would fundamentally alter the underlying trans-action. For example, rectification was not available to

• convert a shareholder loan balance to a return of capital to avoid tax on unpaid shareholder loans (TechnoComm Solutions Inc., 2019 ONSC 924);

• cancel various steps taken in a reorganization and replace them with a new series of steps to alter the dissolution of a limited partnership and change the effective date of dissolution of its general partner (Canada Life, 2018 ONCA 562);

• substitute the name of a corporate borrower with its parent company’s name and interpose additional steps in a com-plex acquisition and reorganization transaction (Harvest Operations, 2017 ABCA 393); and

• retroactively allocate income to a corporate income and capital beneficiary of a personal trust (BC  Trust, 2017 BCSC 209).

Provincial courts generally have been reluctant to exercise their inherent jurisdiction where rectification was not available.

• The CRA’s opinion implies that the carve-out from the paragraph 20(1)(j) deduction only applies to corporate borrowers (see Interpretation Bulletin IT-119R4 (Archived), “Debts of Shareholders and Certain Persons Connected with Shareholders,” August 7, 1998, at paragraph 30(a)). Could it be that the carve-out, and the associated CRA comment, is a holdover from the pre-1972 law when (as one reader has reported) shareholder loans were treated as dividends, and certain dividends were deductible under division C? In other words, the carve-out could be an historical relic with no application in the present Act.

Other arguments support the second interpretation:

• The italicized phrase would be a highly unusual way to refer to division C deductions. The common ways to refer to division C deductions are “in computing the taxable income” (for example, in subsections 110.2(2), 110.6(2), and 110.6(2.1)) or “for the purpose of computing the tax-able income” (for example, in subsections 110(1), 110.1(1), and 111(1)).

• If the italicized phrase is to be limited to amounts that are deductible in computing taxable income, the reference to the taxpayer’s income would seem to be superfluous.

• The phrase “deductible from the taxpayer’s income” does not occur only in division C; subsection 138(6) of division F contains approximately this phrasing. Hence, the itali-cized phrase may not necessarily refer to division  C deductions.

• The word “income” can sometimes refer to gross income rather than net income, as in “for the purpose of earning income” in subparagraph 20(1)(c)(i).

Until there is legislative clarification, cautious tax advisers may wish to suggest that taxpayers avoid this potential pitfall by paying back shareholder loans quickly enough to avoid the subsection 15(2) inclusion.

Martin LeeKakkar CPA Professional Corporation, Vaughan, ONmartin@kakkar.com

Rectification: Where Are We Now?In the two years since the SCC narrowed the availability of rectification in Fairmont Hotels (2016 SCC 56), provincial superior and appellate courts have attempted to interpret the new limits placed on rectification. The post-Fairmont jurispru-dence has largely been determined by the specific facts of each case, but taxpayer success has depended on the existence of contemporaneous documents that demonstrate a specific intention at the time of the transaction—that is, a prior agree-ment with definite and ascertainable terms. If this test is met, rectification is not limited to clerical errors. However, relief is

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intention of the parties. The taxpayer did not implead the tax authorities, but had informed them.

The Quebec Superior Court judge determined that the parties’ actual intentions were that the payments were com-missions paid for the sale of the land and were not part of the sale price of the shares. Despite this judgment, the minister did not adjust the assessments, arguing that he was not bound by the judgment of an application in which he had not been impleaded.

The TCC ruled in favour of the minister. Because the tax authorities had not been impleaded, this matter could not be considered res judicata (a matter that has already been adju-dicated by a competent court). The TCC thus had to determine the intention of the parties again, although the Quebec Superior Court judgment remained an element that had to be taken into consideration. The TCC judge concluded, as the Quebec Superior Court judge had, that the intention of the parties when selling the shares was that the commissions would not be part of the sale price of the shares. As a result, the court allowed the appeal of the assessments, which were then can-celled. The decision has not been appealed.

This decision may be contrasted with Brogan Family Trust (2014 ONSC 6354), in which the Ontario Superior Court of Justice held that the CRA was bound by the declaratory order even though the CRA was not impleaded in that case. The distinction appears to be whether the CRA had established a legal interest by issuing a notice of assessment and becoming a creditor. This had occurred in Bourgault, and thus the tax-payer was required to notify the CRA of the declaratory proceedings; in Brogan, no such legal interest had been established.

Many aspects and arguments were not addressed in Bour-gault: Does judicial courtesy between the courts not exist? Is there an abuse of process when the courts deal with the same issue several times or when a party collaterally attacks a court decision? In addition, the TCC did not address the issue of fairness to the taxpayer; since the tax authorities had been informed of the proceedings before the Quebec Superior Court, they could have intervened at that stage.

Lauzanne Bernard-NormandBCF LLP, MontrealLauzanne.bernardnormand@bcf.ca

Mettre en cause l’ARC dans les recours en rectification et déclaratoirePlusieurs jugements ont traité des circonstances dans lesquelles une erreur dans l’exécution d’une transaction peut être rectifiée par une ordonnance de la cour, mais des questions fondamentales demeurent. La CCI a récemment traité de l’une de ces questions, statuant dans l’affaire

Instead, provincial courts have suggested that taxpayers use self-help alternatives, such as (1) passing director, shareholder, and/or trustee resolutions to retroactively correct records (which would not bind the CRA) and having the TCC adjudi-cate the consequences; (2) pursuing a professional negligence suit against the adviser responsible for the mistake; or (3) ap-plying for a remission order.

There is a large grey area between what provincial courts have found permissible and impermissible. While the impos-ition of an intermediate step may not be fatal if it gives effect to a prior agreement (Crean), steps that would fundamentally alter the transaction may be precluded (Harvest Operations and Canada Life). It is uncertain to what degree one can alter a transaction while remaining within the framework provided by Fairmont Hotels and not have the alteration characterized as impermissible retroactive tax planning.

Finally, note that where rectification is not available, other equitable remedies may be used to solve errors in documenta-tion. One example is rescission, which was considered by the court but denied in Canada Life.

Rami PandherField Law, Calgaryrpandher@fieldlaw.com

Involving the CRA in Rectification and Declaratory ProceedingsMultiple court decisions have addressed the circumstances in which an error in the execution of a transaction may be recti-fied through a court order, but many key questions remain. The TCC has now addressed one of these, ruling in Bourgault (2019 CCI 6, available in French only) that tax authorities must be impleaded (made a party to a court action) in order to be bound by the rectification or declaratory decision. However, this might apply only where the CRA has become a creditor.

The taxpayer had purchased shares of Développement Quatre Saisons Inc. (DQS) but had not paid for the shares at the time of the sale. The taxpayer was to pay the seller a certain amount upon the sale of land that DQS owned, and DQS (not the tax-payer) made these payments during the 2002 to 2004 fiscal years. Owing to ambiguity in the wording of the contractual provisions of the share purchase agreement, differences of opinion arose regarding the nature of these payments. The taxpayer considered the payments to be commissions for the services rendered by the seller for the sale of the land, but the minister determined that the payments were made in con-sideration for the purchase of the shares. As a result, notices of reassessment were issued against the taxpayer. The tax-payer filed an application for a declaratory judgment with the Quebec Superior Court (file number 450-17-001882-068), with the objective of rectifying the agreement to reflect the true

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dans Bourgault, et donc le contribuable devait notifier l’ARC des procédures en jugement déclaratoire; alors que dans Brogan, aucun intérêt judiciaire de ce genre n’avait été établi.

Bien des aspects et des arguments n’ont pas été traités dans la décision Bourgault : N’y a-t-il pas une question de courtoisie judiciaire entre les tribunaux judiciaires? Y a-t-il abus des procédures quand les tribunaux judiciaires traitent d’une même question à plusieurs reprises ou lorsqu’une partie attaque collatéralement une décision judiciaire? De plus, la CCI n’a pas traité de la question d’équité envers le contribuable, les autorités fiscales auraient pu intervenir à la procédure ayant été informée de la procédure devant la Cour supérieure.

Lauzanne Bernard-NormandBCF, s.e.n.c.r.l., MontréalLauzanne.bernardnormand@bcf.ca

Should Expenses of TCC Judges Be Made Public? Bill C-58How much should the public get to know about the expenses, including travel details, of individual TCC judges and other federal superior court judges? As an extension of the principle that the public should be able know how its money is spent, proposed amendments to the Access to Information Act (AIA) (new sections 90.18 to 90.21, in Bill C-58) would require quar-terly electronic publication of the expenses of those judges. (Other provisions cover members of Parliament, senators, and senior federal government employees.) The published infor-mation would cover incidental expenditures, representational allowances, travel allowances, and conference allowances of individual judges, showing the judge’s name, an expense description, the date it was incurred, and total amount. This legislation has been approved by the House of Commons and is now before the Senate. The government has promised that any amendments proposed by the Senate will be carefully considered.

The provisions requiring publication will not apply where certain named individuals determine that the publication of the information could interfere with judicial independence or the security of a person, infrastructure, or goods. Presum-ably, such exemptions will be granted only in exceptional circumstances.

The TCC’s internal controls are strict; for example, no alco-holic beverages are allowed to be expensed. The judges have very little opportunity to abuse the rules. On the other hand, the government argues that anyone who spends money in accordance with the rules should not object to the publication of the relevant information. Certainly, the fuss over Senate expenses a few years ago shows that public disclosure (or the lack of it) can affect behaviour.

Bourgault (2019 CCI 6) que les autorités fiscales doivent être mises en cause (être une partie au litige) pour qu’une décision rectificative ou déclaratoire leur soit opposable. Cependant, cela s’applique probablement seulement lorsque l’ARC est déjà une créancière, soit lorsque des avis de cotisation ont été émis.

Le contribuable avait acheté les actions de Développement Quatre Saisons inc. (DQS) mais n’avait pas payé les actions au moment de la vente. Le contribuable devait payer un certain montant au vendeur lors de la vente de terrains détenus par DQS, et DQS (non pas le contribuable) a fait ces paiements durant les années d’imposition 2002 à 2004. En raison d’une rédaction problématique des dispositions contractuelles de la convention d’achat et de vente d’actions, il y avait des divergences d’interprétations concernant la nature de ces paiements. Le contribuable considérait que ces paiements étaient des commissions pour les services rendus dans le cadre de la vente des terrains, mais le ministre a déterminé plutôt que ces paiements étaient versés en contrepartie de l’achat des actions. Par conséquent, des avis de cotisations ont été émis à l’encontre du contribuable. Le contribuable a présenté une demande pour jugement déclaratoire auprès de la Cour supérieure du Québec (dossier no 450-17-001882-068), afin que la convention traduise bien l’intention réelle des parties. Le contribuable n’avait pas mis en cause les autorités fiscales, mais les avait informées.

La Cour supérieure du Québec a déterminé que l’intention réelle des parties était que les paiements soient des commissions versées pour la vente des terrains et ne faisaient pas partie du prix de vente des actions. Malgré ce jugement, la ministre a maintenu les cotisations soutenant que le jugement ne lui était pas opposable, puisqu’elle n’avait pas été mise en cause.

La CCI a donné raison à la ministre. Les autorités fiscales n’ayant pas été mises en cause, ce jugement ne pouvait donc faire autorité de chose jugée. La CCI devait donc déterminer à nouveau l’intention des parties en prenant en considération le jugement, à titre de fait. Le juge de la CCI a conclu, tout comme le juge de la Cour supérieure du Québec, que l’intention des parties lors de la vente des actions était que les commissions ne fassent pas partie du prix de vente des actions. Ainsi, la Cour a accueilli la demande en appel de cotisation et les cotisations ont été annulées. La décision n’a pas été portée en appel.

Cette décision peut être différenciée de Brogan Family Trust (2014 ONSC 6354), dans laquelle la Cour supérieure de justice de l’Ontario a déterminé que l’ARC était liée par l’ordonnance déclaratoire, et ce malgré que l’ARC n’avait pas été mise en cause dans le dossier. La distinction entre ces deux décisions semble être à l’effet que l’ARC avait établi un intérêt juridique en émettant un avis de cotisation et serait ainsi considérée comme une créancière. Ceci s’est produit

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time (for example, the hotel in which the judge stayed, and the origin and destination of each limousine or cab trip).

Brian CarrThorsteinssons LLP, Torontobcarr@thor.ca

Private Foundations: Exceeding the 20 Percent LimitA private foundation that owns more than 20 percent of a class of shares of a corporation’s stock faces a penalty of 5 percent of the FMV of those excess shares (10 percent for a repeat of-fence), and the CRA may revoke its charitable registration. This limit can be exceeded unintentionally, perhaps by accept-ing a share donation or through the actions of a corporation in which the foundation owns shares (for example, selective redemptions). Corrective actions may be problematic or in-effective (for example, exchanging shares for debt).

The excess corporate holdings  percentage (ECHP) is the percentage of a class of shares held by a private foundation at the end of its taxation year that exceeds the 20 percent limit. A net increase in ECHP is allocated to the private foundation’s divestment obligation percentage (DOP) between its current and fifth subsequent taxation year, depending on how the shares were acquired. A penalty is assessed for any year in which the private foundation has a positive DOP.

Gifting the shares to a public foundation or a charitable organization might solve the problem, since those types of entities are not subject to the excess corporate holdings regime. However, the entities would have to consider the impact that the shares may have on their activities and disbursement quotas, particularly where the shares are not liquid or retract-able. The problem could also be avoided by converting the private foundation into a public foundation.

Another possibility is requesting a reallocation of the DOP to a subsequent taxation year (up to 10 years) under subsec-tion 149.2(6). This reallocation is possible only if the minister believes that it would be just and equitable.

A further potential solution is to sell the shares for cash. However, selling the shares back to the issuing corporation may not be possible if the corporation does not have sufficient liquidity. Finding a third-party purchaser for the shares may not be possible or desirable, and selling the shares for less than FMV to a non-qualified donee may constitute a breach of trust under common law.

Where the issuing corporation does not have the liquidity to pay cash for the shares, another idea that seems attractive at first glance is for the corporation to redeem the shares, with the compensation being a promissory note. However, subsection 188.1(3.2) states that if a private foundation enters into a trans-action to avoid a DOP by substituting shares for “an interest

The unique aspect of the TCC is that it is a travelling court. It meets in 59  locations across Canada to provide access to justice at low cost to the taxpayers bringing their cases before the court. Because of the travel involved, the expenses of TCC judges are likely to stand out as being especially high; in the case of some informal procedure cases heard in locations with few transportation options, judges’ expenses may well exceed the amount of tax at stake. Thus, one can expect criticism of “high-flying elite judges,” such as the ones who inspired com-plaints before the Canadian Judicial Council (later dismissed; see “Ethical Principles of TCC and FCA Judges Revisited,” Canadian Tax Focus, May 2018). This possibility of public criti-cism may make appointments to the TCC less attractive to some judges. Such appointments are already less than entic-ing for top people because of the uncompetitive salary for a mid- to late-career professional, the requirement (for most) to move with one’s family to a new city (TCC judges are required to live in the National Capital Region or within 40 kilometres thereof: section 6(1) of the Tax Court of Canada Act), and the requirement to be on the road for much of the year.

We must balance the risk of some people misinterpreting the amount of expenses against the public need, and right, to know how much was spent. In my view, because of the strict-ness of the internal TCC rules, there is very little to be gained from publishing the expenses of individual judges pursuant to the AIA. Anyone who has a problem with the expenses of the Tax Court should seek an audit of the court’s expenses, not a report of the expenses of individual judges.

If Bill C-58 is enacted in its present form, the chief justice of the Tax Court and the Canadian Judicial Council must take on the responsibility of explaining the unique circumstances of the TCC to the media. The court shouldn’t run from everyone who has a recording device in his or her hand, because the media is a voice for the public’s interest in how government institutions are run.

The bigger issue is security. The nature of judging is that one party in any case is likely to be unhappy about the out-come. And to some people, judges are always representatives of the government and its power over citizens. We are all too aware of the murder of His Honour Judge Alban Garron, his wife, and a neighbour in 2007 by a taxpayer who was mad at the CRA. There are already many unavoidable security issues. The TCC publishes hearing dates and locations in advance, without naming the particular judge (although this informa-tion is available from the TCC registrar: “Attending TCC Hearings,” Canadian Tax Focus, February 2019). Further, many of the places where tax judges sit in Canada are not courthouses and do not have proper security. We can avoid adding to these security issues by carefully considering the details of the Bill C-58 disclosures. In particular, the publica-tion of judges’ expenses could redact any information that would tend to disclose where a judge was at any particular

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should be interpreted in the entire context of the scheme and object of the Act. Thus, in practice, the withholding amount is generally calculated in accordance with this principle by multiplying the non-resident employee’s annual remunera-tion by the number of days worked in Canada divided by the total number of working days that year. Commentators have generally recommended this approach; see, for example, “Regulations  102 and 105 and Cross-Border Compliance Issues” in the Canadian Tax Foundation’s 2013 annual confer-ence report.

The difficulty is that the CRA has not explicitly endorsed this approach, except in narrow circumstances. Guide T4001, the “Employers’ Guide—Payroll Deductions and Remittances,” suggests that non-resident directors who attend meetings in Canada are subject to Canadian income tax and withholding based on the number of working days they spend in Canada in relation to the total days they worked overall. Similarly, in respect of a non-resident employee stock option plan, the CRA suggests calculating an employee’s taxable Canadian income by multiplying the total benefit derived by the proportion of  working days spent in Canada over the total number of working days that year (CRA document no. 2012-0440741I7, July 6, 2012).

Employers looking to avoid being assessed penalties for underwithholding would appreciate more general assurance that only Canadian income of non-resident employees is sub-ject to withholding.

Carl P. Deeprose and Travis BertrandNorton Rose Fulbright Canada LLP, Torontocarl.deeprose@nortonrosefulbright.comtravis.bertrand@nortonrosefulbright.com

Access to Information: CRA Need Not DiscloseAlthough section  241 generally protects the privacy of tax-payer information, paragraph  241(3)(b) allows the CRA to disclose information in respect of legal proceedings relating to tax administration and enforcement. Nonetheless, in Brad-wick Property Management Services Inc. v. Canada (National Revenue) (2019 FC 289), the FC held that such disclosure is not a requirement; the CRA still has discretion over whether to release the information. Questions remain as to whether this decision is consistent with the SCC decision in Slattery (Trustee of) v. Slattery ([1993] 3 SCR 430).

In Bradwick Property, the taxpayer filed notices of objection to reassessments issued by the CRA disallowing certain deduc-tions for accounting services. It also filed 11 requests under the Access to Information Act seeking information provided to the CRA by the taxpayer’s accountant in respect of the re-assessments. The documents disclosed by the CRA contained

(or for civil law, a right), in a corporation other than shares,” then for this purpose such interest is deemed to have been converted back into shares at their FMV. Is debt considered an “interest,” or is that term restricted to a form of equity participation, such as a stock option or warrant? In a technical interpretation provided to the author (dated December  12, 2018), which should at some point become public, the CRA takes the former interpretation. Thus, this exchange would not reduce the DOP, and the ECHP problem would still exist.

A side point: Suppose the ECHP problem arises because an individual donates shares of his or her private company to a private foundation. In that case, some planning might be required to ensure that the foundation can issue a donation receipt, because a non-qualifying security includes shares of a corporation not dealing at arm’s length with the donor (subsection 118.1(18)).

Simon CheungGardiner Roberts LLP, Torontoscheung@grllp.com

Non-Resident Employees: Withhold on Worldwide Income?ITA regulation 102 requires employers to withhold tax on re-muneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver (regulation 102 waiver) or certification as a qualifying non-resident employer. However, often there is not sufficient time to do this before the employment is to begin, or there is a lack of awareness of the rules. Where the employer must withhold tax, should the amount be based on the non-resident employee’s Canadian income or worldwide income? Clarification from the CRA would be appreciated.

Specifically, regulation 102 imposes withholding on “any payment of remuneration  .  .  . made to an employee in his taxation year.  .  .  .” The definition of “remuneration” under regulation 100(1) does not specify that the remuneration is only in respect of Canadian employment. Accordingly, a cross-border non-resident employee who is employed in Canada for 5 percent of his or her workdays could technically be subject to Canadian withholding tax on all worldwide remuneration, in addition to withholding tax in his or her country of resi-dence. Of course, this excess Canadian withholding would be refunded after the employee files a T1 tax return.

Subparagraph 115(1)(a)(i) specifically limits the taxable em-ployment income of a non-resident person earned in Canada to “incomes from the duties of offices and employments per-formed by the non-resident person in Canada.” Thus, the person is not liable for tax on non-Canadian income. One might extend this argument to withholding and therefore not withhold tax on such income, on the basis that the regulations

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Holdcos, each with a 20 percent interest in KT Holdings, in both votes and value.

Under the old structure, KT  Holdings and Kal  Tire Ltd. could not claim the SBD because their combined taxable capital employed in Canada was too high. Under the new structure, each Holdco (including the appellant) was associated with KT Holdings. Pursuant to paragraph 256(2)(a), two corpora-tions (the Holdcos) that are associated with the same corporation (KT Holdings) are deemed to be associated with each other. However, KT  Holdings made an election under paragraph 256(2)(b) not to be associated with the Holdcos for the purposes of section 125. This meant that each Holdco was able to maintain its $500,000 small business limit.

The subsection 256(2.1) anti-avoidance rule deems corpor-ations to be associated where it may reasonably be considered that one of the main reasons for the separate existence of those corporations is to reduce the amount of taxes otherwise pay-able. To make this determination, the court should first assess the subjective intent of the appellant and then determine, on an objective basis, whether there is enough evidence to sup-port that intention. As stated in Lenco Fibre Canada Corp. v. The Queen (79 DTC 5292 (FCTD)), the word “main” must be given significance; the reduction of taxes payable could be a reason but “a judgment must still be made as to whether it was a main or principal reason.” The TCC concluded that the appellant did not adduce sufficient evidence to establish that the reduction of taxes was not one of the main reasons for the separate existence of the Holdcos. Emphasis was put on various documents from a large accounting firm that detailed the plan to multiply the SBD and showed that tax reduction was emphasized on multiple occasions. The appellant brought forward other reasons for the separate existence of the Holdcos, but the only one held to be valid by the TCC was estate planning.

Interestingly, the appellant submitted that investment plan-ning was a main reason to consider, because it allowed each child to choose to what extent dividends would be used for personal expenses or money would be left inside the Holdcos and invested at the corporate level. This is usually an import-ant reason for people to use separate holding corporations, in addition to creditor protection. However, the TCC refused to consider this as a main reason because the Kal Tire Partner-ship had a policy of not distributing profits, and KT Holdings had a history of making modest distributions. Would the court’s conclusion have been different had there been no such policy and substantial dividends were paid to the Holdcos during the years under appeal?

Also, the method used by the Holdcos to generate ABI on which to claim the SBD is noteworthy. Their strategy was to generate interest income, through a series of intercorporate dividends and loans, that was deemed to be ABI under para-graph 129(6)(b). As a result of an amendment to subparagraph 125(1)(a)(i), effective for taxation years beginning after

redactions, so the taxpayer brought an application for judicial review of the CRA’s redactions.

The FC held that paragraph  241(3)(b) applied to the tax-payer’s requests, since the requests were in respect of notices of objection that were related to the administration or enforce-ment. This is in contrast to Scott Slipp Nissan Ltd. v. Canada (Attorney General) (2005 FC 1477), where the FC found that a notice of objection was not the type of “proceeding” contem-plated by subsection 295(4) of the Excise Tax Act (a provision nearly identical to subsection  241(3) of the ITA). Bradwick Property’s broader application of the exception in paragraph 241(3)(b) allows taxpayers to access information at an earlier stage in the dispute resolution process, and may allow them to avoid a trial as a result.

Despite finding that paragraph 241(3)(b) applied, and there-fore that the CRA was authorized to disclose the information, the FC went on to say that the CRA still maintained limited discretion to release (or withhold) confidential information. This was based on paragraphs 241(4)(a) and (b), which state that the CRA “may” disclose to any person any taxpayer infor-mation in the specific circumstances set out there. The FC held that the redacted information was not necessary to the administration or enforcement of the ITA, or for determining taxes owed by the taxpayer. Thus, it did not order the CRA to disclose the information.

The FC’s finding that the CRA had discretion in deciding whether to release (or withhold) taxpayer information, after it had already decided that paragraph 241(3)(b) authorized its disclosure, is hard to reconcile not only with section 241 when read as a whole, but also with the SCC’s decision in Slattery. It seems logical that if Parliament wanted the CRA to have such discretion in the circumstances enumerated under paragraphs 241(3)(a) and (b), it would have included those circumstances under subsection 241(4).

Paige DonnellyDentons Canada LLP, Torontopaige.donnelly@dentons.com

TCC Curtails SBD MultiplicationIn Jencal Holdings Ltd. v. The Queen (2019 TCC 16), the TCC applied the deemed association rule in subsection 256(2.1) to force the corporations involved to share the $500,000 business limit because tax reduction was held to be one of the main purposes of the corporations’ separate existence.

The case concerns a business with multiple subsidiaries owned by the Kal Tire Partnership, a partner of which was a corporation (“Kal Tire Ltd.”) wholly owned by Kal Tire Hold-ings Ltd. (“KT Holdings”). The common shares of this latter corporation were held by a trust for the benefit of the owner’s children. The common shares were later distributed to the five children; subsequently, they transferred their shares to five

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possible que la réduction de l’impôt soit l’un des motifs, mais le tribunal doit « déterminer s’il s’agit de l’un des motifs principaux » (traduction non officielle). La CCI a conclu que l’appelant n’avait pas produit suffisamment d’éléments de preuve pour établir que la réduction des impôts n’était pas l’un des motifs principaux de l’existence distincte des sociétés de portefeuille. Dans le cadre des procédures, l’accent a été mis sur divers documents d’un grand cabinet d’experts-comptables qui décrivaient en détail le plan visant la multiplication de la DAPE et qui mettaient l’emphase sur la réduction des impôts à de multiples reprises. L’appelant a fait valoir d’autres motifs pour justifier l’existence de sociétés de portefeuille distinctes, mais la planification successorale est le seul que la CCI a jugé valable.

Fait intéressant, l’appelant a soutenu que la planification en matière de placements était l’une des raisons principales de la structure d’entreprise mise en place, car cette dernière permettait à chaque enfant de choisir la mesure dans laquelle les dividendes seraient utilisés pour couvrir leurs dépenses personnelles, ou si les sommes seraient conservées dans les sociétés de portefeuille et investies à ce niveau. Il s’agit de l’une des raisons courantes pour lesquelles les gens ont recours à des sociétés de portefeuille distinctes, outre la protection contre les créanciers. La CCI a toutefois refusé de considérer la planification des placements comme un motif principal parce que Kal Tire Partnership avait pour politique de ne pas distribuer ses bénéfices et que KT Holdings avait un historique de distributions modestes. La conclusion du tribunal aurait-elle été différente si Kal Tire Partnership n’avait pas une telle politique et si des dividendes substantiels avaient été versés aux sociétés de portefeuille au cours des années visées par l’appel?

Il convient également de souligner la méthode que les sociétés de portefeuille utilisaient pour générer du revenu d’entreprise exploitée activement (REEA) à l’égard duquel la DAPE pouvait être demandée. Leur stratégie consistait à générer, par l’intermédiaire de dividendes et de prêts intersociétés, des revenus d’intérêt qui étaient réputés constitué du REEA en vertu de l’alinéa 129(6)b). Par suite d’une modification apportée au sous-alinéa 125(1)a)(i) pour les années d’imposition commençant après le 21 mars 2016, ce type de REEA n’est plus admissible à la DAPE lorsqu’un choix selon le paragraphe 256(2) est exercé.

Joy ElkeslassySpiegel Sohmer Inc., Montréaljelkeslassy@spiegelsohmer.com

March 21, 2016, this type of ABI is ineligible for the SBD if an election under subsection 256(2) is made.

Joy ElkeslassySpiegel Sohmer Inc., Montrealjelkeslassy@spiegelsohmer.com

La CCI freine la multiplication de la déduction accordée aux petites entreprisesDans l’affaire Jencal Holdings Ltd. v. The Queen (2019 TCC 16), la Cour canadienne de l’impôt (CCI) a appliqué la règle de présomption d’association du paragraphe 256(2.1) afin d’obliger les sociétés en cause à se partager le plafond des affaires de 500 000 $, jugeant que la réduction des impôts était l’un des principaux motifs de l’existence distincte de ces sociétés.

L’affaire concerne une entreprise possédant plusieurs filiales qui appartient à Kal Tire Partnership, dont l’un des associés était une société (« Kal Tire Ltd. ») détenue à 100 pour cent par Kal Tire Holdings Ltd (« KT Holdings »). Les actions ordinaires de cette dernière société étaient détenues par une fiducie au profit des enfants du propriétaire. Ces actions ont ensuite été distribuées aux cinq enfants, qui les ont transférées à cinq sociétés de portefeuille, détenant chacune une participation de 20 pour cent dans KT Holdings, tant en valeur qu’en droits de vote.

Sous l’ancienne structure d’entreprise, KT Holdings et Kal Tire Ltd. ne pouvaient pas demander la déduction accordée aux petites entreprises (DAPE), car leur capital imposable utilisé au Canada combiné était trop élevé. Sous la nouvelle structure, chaque société de portefeuille (y compris l’appelante) était associée à KT Holdings. En vertu de l’alinéa 256(2)a), deux sociétés (les sociétés de portefeuille) qui sont associées à une même société (KT Holdings) sont réputées être associées l’une à l’autre. Toutefois, KT Holdings a fait le choix prévu à l’alinéa 256(2)b) de ne pas être associée aux sociétés de portefeuille pour l’application de l’article 125. Chaque société de portefeuille a ainsi été en mesure de conserver son plafond des affaires de 500 000 $.

La règle anti-évitement prévue au paragraphe 256(2.1) fait en sorte que des sociétés soient réputées être associées l’une à l’autre s’il est raisonnable de considérer qu’un des principaux motifs de leur existence distincte consiste à réduire les impôts qui seraient payables par ailleurs. Pour procéder à cette détermination, le tribunal doit d’abord examiner l’intention subjective de l’appelant, puis doit déterminer, sur une base objective, s’il existe suffisamment de preuves pour démontrer cette intention. Comme indiqué dans Lenco Fibre Canada Corp. v. The Queen (79 DTC 5292 (CF)), il faut tenir compte du mot « principaux » : il est

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question on their tax return). In this case, the taxpayer had advised its accountant that it entered into a new lease and the court found that this was sufficient to discharge the taxpayer of its standard of care. Finally, the court found that there was no proof that the taxpayer would have noticed anything was unusual on the GST return, even if it had reviewed the return with its accountant. In any event, case law holds that the relevant question is whether the taxpayer was negligent or careless in making a misrepresentation, not whether the tax-payer’s adviser was negligent or careless (Aridi v. The Queen, 2013 TCC 74).

Jamie HermanMIG Group, Torontojh@mig.group

Tracy WuHennick Herman LLPRichmond Hill, ONtwu@hh-llp.ca

Gap in Subsections 40(3.3) and (3.4) for Wound-Up Trust?Subsections 40(3.3) and (3.4) generally apply to prevent a cor-poration, partnership, or trust from realizing a pregnant loss on certain non-depreciable capital property by transferring the property within an affiliated group. Where the rules apply, the loss is “suspended” and cannot be claimed by the trans-feror until a listed trigger event occurs, such as a disposition to an unaffiliated person. Subsections 40(3.3) and (3.4) stipu-late whether the two parties remain affiliated after the transferor is dissolved or wound up, but only if the transferor is a corporation or a partnership. Thus, if a trust distributes property to an affiliated beneficiary and winds up immediately after the distribution, it is unclear whether these suspended-loss rules apply. This gap in the legislation may not come up often in practice, since trusts may generally distribute assets to Canadian-resident beneficiaries on a rollover basis under subsection 107(2), but it could be relevant when the distribu-tion is not executed on a rollover basis (for example, pursuant to a subsection 107(2.001) election) or when a trust transfers property to a person who is not a beneficiary.

There are several CRA rulings dealing with alter ego trusts that imply that a transferee cannot be affiliated with a trans-feror trust once the trust has wound up. In fact, on at least two occasions, the CRA has explicitly stated that a person cannot be affiliated with a trust that has wound up: see CRA document nos. 2007-0221361R3, released October  17, 2008 and 2008-0292121R3, released March  6, 2009. While these statements are fairly explicit, their efficacy may be limited be-cause they are rulings, and not general statements of the CRA’s position. Also, because these rulings were heavily redacted,

TCC Finds Lack of Knowledge, Not MisrepresentationUnder the Excise Tax Act (ETA), the CRA cannot assess a tax-payer beyond a four-year time limit, except where the taxpayer has made a misrepresentation due to neglect, carelessness, or wilful default. In Prima Properties (92) Ltd. v. The Queen (2019 TCC 4), the TCC rejected the minister’s position that the tax-payer made such a misrepresentation involving a change in use of its property. Query: Does it follow from this decision that a taxpayer’s failure to report an Airbnb-type change in use from long-term residential property (exempt supplies) to a short-term residential property (taxable supplies if there is income over $30,000) is similarly not a misrepresentation due to neglect or carelessness?

In Prima Properties, the taxpayer owned a hotel, which it initially leased to a hotel operator. Later, the taxpayer leased the hotel to a non-profit organization, which used the property to provide transitory accommodation for homeless people. The minister’s position was that when the hotel lease ended and the non-profit lease began, the property ceased to be used for commercial activities and became a residential complex used in the making of an exempt supply; therefore, under ETA subsection  206(4), GST was owing at the time of the change in use on the FMV of the property. However, the min-ister’s reassessment was beyond the four-year time limit. The minister’s position was that the reassessment was allowed because the taxpayer’s failure to report the GST it was deemed to have collected was a misrepresentation due to neglect or carelessness.

The court found that the minister failed to bring evidence to demonstrate that the change-of-use provisions applied (for example, evidence from the non-profit organization to show how the units were occupied), which made it impossible to know whether there was a misrepresentation. Further, even if there was a misrepresentation, the court found that it would not have been due to the taxpayer’s neglect or carelessness. The court rejected the minister’s position that the taxpayer should have suspected or believed that the lease change would have GST consequences, or that it should have communicated this change to its accountant and sought tax advice. From the taxpayer’s point of view, there was simply a change of tenant. Also, the complex change-of-use provisions would not be apparent to a lay person, and it would be unreasonable to require the taxpayer to specifically question its accountant on this issue.

The court distinguished these facts from cases where tax-payers (1)  knew or ought to have known that they omitted items from their tax returns or (2)  should have questioned their accountants about particular matters. In those cases, the taxpayers either were aware of the relevant tax legislation or should have been aware (for example, because of a specific

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one cannot be sure that there was an affiliation prior to the trusts’ windup.

In CRA document no. 2004-0091061E5, March 21, 2007, the CRA was asked whether a previous version of subsection 13(21.2) (an analogous rule to subsections 40(3.3) and (3.4), but for depreciable property) would apply where the transferor trust was wound up within the relevant holding period. The CRA’s position was that subsection 13(21.2) would not apply, because the transferor and the transferee would cease to be affiliated during the holding period. However, the CRA has caused confusion by adding that this view would not extend to subsection  40(3.3), because that subsection  requires the transferor or a person affiliated with the transferor to own the property at the end of the period. It is not clear on what basis the wound-up transferor would not be affiliated with the transferee for the purposes of subsection 13(21.2), but would be affiliated for the purposes of subsection 40(3.3).

Where does this leave us? We have clear statements from the CRA in rulings saying that a wound-up trust cannot be affiliated with any person, but these are qualified for the reasons above. We also have a clear statement from the CRA saying that this is not the appropriate interpretation of subsection 40(3.3), even though this was its position for the purposes of former sub-section 13(21.2). (No reasons were given for this distinction.)

On policy grounds, the CRA position in the rulings appears to be preferable. For corporations, a subsection 88(1) corpor-ate windup is not a trigger event; that is, the loss remains suspended until a “real” trigger event occurs. Presumably, this is because on a subsection 88(1) windup, the parent corpora-tion will generally have access to the wound-up subsidiary’s losses, and therefore will be able to utilize the suspended loss on the occurrence of a trigger event. In contrast, a windup that is not under subsection 88(1) is a trigger event.

For partnerships, a dissolved partnership is deemed to con-tinue to exist, and its partners immediately before dissolution are deemed to remain partners, until a trigger event occurs; again, presumably, this is because the partners could claim the suspended loss at that time.

The windup of a trust may be similar to the non-subsection 88(1) corporate windup, since the suspended loss would not be available for the wound-up trust’s beneficiaries.

Amanda LarenRobins Appleby LLP, Torontoalaren@robapp.com

US Anti-Hybrid Rules Affect Financing StructuresProposed regulations released on December 20, 2018 broaden the reach of IRC section 267A, a new US anti-hybrid provision enacted as part of the Tax Cuts and Jobs Act. In addition to the disallowance of a deduction for any royalty or interest paid

or accrued (a “specified payment”) pursuant to a hybrid trans-action or by, or to, a hybrid entity, the proposed regulations include hybrid arrangements, or similar arrangements involv-ing branches, that produce a direct or indirect “deduction/non-inclusion” outcome. Canadian multinationals using finan-cing arrangements are now affected by these rules and have to find alternatives to their current financing structures.

A hybrid transaction is any transaction under which one or more payments are treated as interest or royalties for US federal income tax purposes but are not treated as such for the pur-poses of the tax law of the foreign country in which the entity is resident or is subject to tax. A deduction for a specified payment should be disallowed to the extent that the payment is (1) a “disqualified hybrid amount,” (2) a “disqualified im-ported mismatch amount,” or (3) a specified payment under the anti-avoidance rules. As one example, a disqualified hybrid amount is a specified payment pursuant to a hybrid trans-action, a disregarded payment, a deemed branch payment, etc.

Proposed regulations section  1.267A-4 provides rules to address “imported” hybrid and branch arrangements. These rules deny a deduction for payments that do not involve hybrid entities or transactions when the foreign recipient directly or indirectly benefits from a “hybrid deduction.” Specifically, under the rules of proposed regulations section 1.267A-4, a specified payment is a disqualified imported mismatch amount to the extent that the income attributable to the pay-ment is directly or indirectly offset by a hybrid deduction incurred by a tax resident. For this purpose, a “hybrid deduc-tion” is an amount for which a foreign tax resident or a taxable branch is allowed a deduction for a specified payment under its domestic tax law, to the extent that the deduction would be disallowed if such tax law were to contain rules similar to IRC section 267A. The intent is to avoid a shift or “import” of an “offshore” hybrid arrangement into the United States through the implementation of a non-hybrid arrangement.

Finally, these proposed regulations contain an anti-avoidance rule that disallows a deduction for a specified payment if there is a deduction/non-inclusion outcome for the foreign recipient and a principal purpose of the plan or arrangement is to “avoid the purposes of the regulations under IRC section 267A.”

Although the policy objective behind the proposed anti-hybrid regulations is intended to be consistent with the approaches to similar issues addressed, among other things, in action 2 of the OECD’s BEPS action plan, the proposed regu-lations announced under IRC section 267A seem to go beyond the breadth of the core principles outlined by the OECD to address hybrid arrangements. In fact, the proposed regula-tions raise several questions of interpretation and areas of uncertainty with respect to certain financing arrangements involving, notably, interest-free loans previously used by Can-adian multinationals to finance their US operations and acquisitions. Other commonly used structures, such as sale and repurchase agreement (REPO) structures, structures using

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mandatorily redeemable preferred shares in Luxembourg (MRPS), and non-taxable foreign branch structures, are now clearly targeted and affected.

These changes present significant challenges to Canadian multinationals that are currently seeking alternative solutions. However, each alternative appears to have its share of advan-tages and disadvantages that must take into account many restrictions (for example, anti-treaty-shopping rules and other limitations in US tax treaties, local country tax reform, such as in Switzerland, or the correlative impact of BEAT [US base erosion and anti-abuse tax]). The final regulations should clarify some of the ambiguity. The Treasury has expressed an intent for the final adoption to occur by the end of June 2019, such that the proposed anti-hybrid regulations would be effect-ive retroactively from January 1, 2018.

Justine Morin and Marguerite AuclairKPMG LLP, Montrealjustinemorin@kpmg.camargueriteauclair@kpmg.ca

Les nouvelles règles anti-hybrides américaines impactent les structures de financementLe projet de règlement publié le 20 décembre 2018 propose d’élargir la portée de l’article 267A de l’IRC, une nouvelle disposition anti-hybride promulguée dans le cadre de la loi intitulée Tax Cuts and Jobs Act. En sus d’interdire la déduction de toute redevance ou de tout intérêt payé ou couru (un « paiement déterminé ») relativement à une opération hybride ou à une opération conclue entre des entités hybrides, le projet de règlement vise les arrangements hybrides et les arrangements similaires impliquant des succursales qui produisent un effet de « déduction/non-inclusion » de façon directe ou indirecte. Les multinationales canadiennes qui ont recours à des opérations hybrides sont impactées par ces règles et doivent trouver des solutions pour mettre à jour leurs structures de financement.

Une opération hybride est une opération dans le cadre duquel un ou plusieurs paiements sont traités comme des intérêts ou des redevances aux fins de l’impôt sur le revenu fédéral des États-Unis, mais ne sont pas traités comme tels aux fins de la législation fiscale du pays étranger dans lequel l’entité réside ou est assujettie à l’impôt. Une déduction à l’égard d’un paiement déterminé sera refusée si le paiement constitue (1) un « montant hybride exclu » (disqualified hybrid amount), (2) un « montant hybride importé exclu » (disqualified imported mismatch amount) ou (3) un paiement déterminé en vertu des règles anti-évitement. À titre d’exemple, les paiements suivants constituent un montant

hybride exclu : un paiement déterminé effectué dans le cadre d’une opération hybride, un paiement non pris en compte, un paiement réputé avoir été effectué par une succursale, etc.

Le règlement proposé 1.267A-4 prévoit des règles visant les arrangements hybrides « importés » et les opérations avec les succursales. Ces règles interdisent la déduction des paiements qui n’impliquent pas d’entités ou d’opérations hybrides dans la mesure où le destinataire à l’étranger bénéficie, de façon directe ou indirecte, d’une « déduction hybride ». Selon le règlement proposé 1.267A-4 un paiement déterminé constitue un montant hybride importé exclu dans la mesure où le revenu attribuable au paiement est contrebalancé, de façon directe ou indirecte, par une déduction hybride engagée par une personne assujettie à l’impôt. À cette fin, une « déduction hybride » désigne une déduction qu’un résident d’un autre territoire aux fins de l’impôt, ou une succursale imposable à l’étranger, peut demander à l’égard d’un paiement déterminé en vertu des lois fiscales auxquelles il est assujetti, mais qui n’aurait pas été permise si ces lois fiscales avaient inclus des règles similaires à l’article 267A de l’IRC. L’objectif est d’éviter que des dispositifs hybrides mis en place dans un territoire étranger puissent être « importés » aux États-Unis au moyen d’une opération non hybride.

Pour terminer, le projet de règlement contient une disposition anti-évitement qui interdit la déduction d’un paiement déterminé s’il y a un effet de déduction/non-inclusion pour le destinataire à l’étranger et que l’un des principaux objectifs du plan ou du dispositif est d’éviter l’application des règles issus du projet de règlement.

Bien que l’objectif sous-tendant le projet de règlement anti-hybride de l’article 267A de l’IRC semblait d’être consistent avec les autres approches visant des situations similaires, notamment l’action 2 du plan d’action BEPS de l’Organisation de coopération et de développement économiques (OCDE), ce projet semble aller au-delà des principes fondamentaux décrits par l’OCDE sur le traitement des opérations hybrides. En effet, le projet de règlement soulève plusieurs incertitudes et questions d’interprétation à l’égard de certaines structures de financement, dont entre autres celles où des prêts sans intérêt avaient été mis en place par les multinationales canadiennes pour financer leurs activités et leurs acquisitions aux États-Unis. D’autres structures de financement couramment utilisées, telles que les structures utilisant les conventions de REPO (repurchase agreement), les actions rachetables du type « MRPS » au Luxembourg et les structures utilisant des succursales étrangères non imposables, sont maintenant sans équivoque ciblées et touchées par les nouvelles mesures.

Ces changements réglementaires amènent ainsi des défis importants aux multinationales canadiennes qui sont actuellement à la recherche de solutions alternatives.

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Toutefois, chaque solution semble comporter son lot d’avantages et de désavantages qui doivent tenir compte de nombreuses restrictions (par exemple, les règles sur le chalandage fiscal et autres restrictions contenues dans les conventions fiscales avec les États-Unis, les réformes fiscales nationales comme celle en Suisse, ou encore l’incidence corrélative de BEAT (US base erosion and anti-abuse tax). La version finale du projet de règlement devrait clarifier certaines ambiguïtés. Le Trésor des États-Unis a exprimé son intention que l’adoption finale soit faite d’ici la fin juin 2019, de sorte que le projet de règlement anti-hybride entre en vigueur rétroactivement au 1er janvier 2018.

Justine Morin et Marguerite AuclairKPMG s.r.l./S.E.N.C.R.L., Montréaljustinemorin@kpmg.camargueriteauclair@kpmg.ca

BC Speculation and Vacancy Tax: Surprises for Non-Residents and TrusteesMarch 31, 2019 marked this year’s deadline to file declarations pursuant to the Speculation and Vacancy Tax Act (British Col-umbia) (“the SVT Act”). The SVT Act imposes an annual tax (of 0.5 percent for 2018, increasing to 2 percent for some tax-payers in 2019) on residential property in specified areas of British Columbia, subject to various exemptions. Notwith-standing the Speculation and Vacancy Tax (SVT) website’s assertion that claiming an exemption is “easy to do,” some owners found it to be quite the opposite.

Non-ResidentsMany owners were surprised to learn that a Canadian citizen or permanent resident is liable for SVT on his or her principal residence if the owner and the owner’s spouse collectively reported less than 50 percent of their income on a Canadian tax return in the previous year. Notably, Canadian-source pas-sive income (including rent, unless the owner elected under section 216 of the ITA) is not considered “reported income,” even if tax was remitted through withholding. This is a result of the SVT Act’s definition of “reported total income,” a term that, when applied to a non-resident taxpayer, generally re-quires the filing of a return in Canada or the issuance of an assessment under part I of the ITA.

Moreover, a non-resident individual will not be able to claim a tax credit against the SVT unless the non-resident or his or her spouse earned income derived from an office or employ-ment in British Columbia or a business carried on through a permanent establishment in British Columbia. This is because

the credit is based on BC income, and the SVT Act uses the provincial income allocation rules in ITA regulations 2600 to 2607 to determine BC income.

TrusteesThe declaration required trustee owners to determine the beneficial owners of the property. A “beneficial owner” includes a person who “has a beneficial interest in respect of the inter-est in the residential property.” However, it is uncommon for a beneficiary to have a vested interest in a specific asset held by the trust. Therefore, many trustees lacked sufficient guid-ance to make this determination and faced considerable uncertainty in completing the declaration.

The potential adverse consequences of this ambiguity are particularly serious for trustees of life interest trusts described in paragraph 104(4)(a) of the ITA, which are commonly used for end-of-life planning in wills or as will substitutes. The terms of such trusts preclude anyone other than the settlor or the settlor’s spouse from obtaining any income or capital of the trust during the settlor’s or spouse’s lifetime. It is com-mon for these trusts to own the settlor’s or spouse’s home. Since the SVT Act’s principal residence exemption requires that all beneficial owners reside in British Columbia, the ambiguity in the definition of “beneficial owner” calls into question whether many British Columbians whose homes are owned by a trust may be subject to SVT on those homes.

The purposes of the beneficial ownership provision, to the extent that they can be gleaned from the minister of finance’s remarks in debate, include identifying the “actual owner” and ensuring that taxpayers receive “an exemption they should be receiving.” Therefore, it seems improbable that a beneficiary who is named in the post mortem distribution provisions of the trust should be considered a beneficial owner in a year in which he or she cannot influence the use of the property or receive any benefit from it. This would be inconsistent with the stated purposes of the legislation, since it would impose SVT on many homes that are occupied by British Columbians who are not members of a “satellite family” (an individual or spousal unit, the majority of whose total worldwide income for the year is not reported on a Canadian tax return). How-ever, clarification would no doubt provide welcome relief from the uncertainty faced by many British Columbians.

Laura PeachLegacy Tax + Trust Lawyers, Vancouverlpeach@legacylawyers.ca

Mistaken Overreporting of IncomeIn Revera Long Term Care Inc. v. Canada (National Revenue) (2019 FC 239; under appeal), the taxpayer reported income that should have been allocated to a tax-exempt member of the

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corporate group. At issue was the CRA’s refusal to reassess the taxpayer, and decrease the income from the taxpayer’s returns, for years that were statute-barred. The FC confirmed its jurisdiction on this matter, concluded that the CRA’s deci-sion was unreasonable because it did not properly apply the principles of statutory interpretation, and sent the matter back to the minister for redetermination. Could this decision have implications in a transfer-pricing downward-adjustment context?

The taxpayer had overreported about $9 million of income per year for seven taxation years as a result of its outside accountant’s mistake. The minister agreed that income had been overreported and agreed to reduce the taxpayer’s income (or increase its loss), but only for years that were loss years and years that were not statute-barred; this excluded 2009 and 2010. The taxpayer argued that subparagraph 152(4)(a)(i) is two-sided; it allows reassessments beyond the normal reassess-ment period in situations of both underreported and overreported income. However, the minister’s view was that she lacked such discretion in regard to overreported income. The taxpayer applied to the FC to review the minister’s deci-sion to not proceed with the income adjustment for the 2009 and 2010 taxation years.

The minister first argued that the proper forum to decide this issue was the TCC and not the FC, since it related to a dispute over an assessment. The FC confirmed its jurisdiction because the question was whether the minister had reason-ably decided that she did not have the discretion to reassess the taxpayer’s 2009 and 2010 taxation years pursuant to sub-paragraph 152(4)(a)(i). This refusal was not appealable to the TCC.

On the main issue, the FC concluded that the decision was not reasonable because nothing in the reasons provided to the taxpayer or in the court record indicated that the minister conducted any textual, contextual, and purposive analysis of the applicable provision, as the SCC required in Canada Trustco Mortgage Co. v. Canada (2005 SCC 54). However, the FC refused to accede to the taxpayer’s request that it exercise its discre-tion  to interpret subparagraph  152(4)(a)(i) and provide guidance for the minister. The court instead set aside the decision and sent it back to the minister for redetermination. Since there is a possibility that the minster’s redetermina-tion will result in a refusal to make the income adjustments, the taxpayer has filed an appeal with the FCA.

The decision may have application in a transfer-pricing context. Where the minister refuses to adjust overstated income pursuant to subsection 247(10) (transfer-pricing down-ward adjustments) and does not issue a notice of reassessment, the FC may be the correct court to review her refusal. More-over, taxpayers could seek to rely on subparagraph 152(4)(a)(i) in situations where income is overreported by misrepresenta-

tion and an adjustment under subsection  247(10) is not possible because the year is statute-barred.

Nathalie PerronBarsalou Lawson Rheault, Montrealn.perron@barsalou.ca

Erreur de surdéclaration du revenuDans Revera Long Term Care Inc. v. The Queen (2019 FC 239; décision portée en appel), le contribuable a déclaré un revenu qui aurait dû être attribué à un membre exonéré d’impôt du groupe de sociétés. La question en litige était le refus de l’ARC d’établir une nouvelle cotisation pour le contribuable, et de réduire le revenu dans les déclarations du contribuable pour les années frappées de prescription. La CF a confirmé sa juridiction sur cette question, a conclu que la décision de l’ARC n’était pas raisonnable parce qu’elle n’appliquait pas adéquatement les principes de l’interprétation législative, et a renvoyé la question à la ministre du Revenu national. Est-ce que cette décision pourrait avoir des implications dans le contexte d’un ajustement à la baisse en matière de prix de transfert?

Le contribuable avait surdéclaré environ 9 millions de dollars de revenu par année pour sept années d’imposition à cause d’une erreur de son comptable externe. La ministre a reconnu que le revenu avait été surdéclaré et elle a accepté de réduire le revenu du contribuable (ou d’augmenter sa perte), mais seulement pour les années qui n’étaient pas frappées de prescription ou encore à perte, ce qui excluait 2009 et 2010. Le contribuable a fait valoir que le sous-alinéa 152(4)a)(i) s’applique dans les deux sens; il permet la détermination d’une nouvelle cotisation au-delà de la période normale de nouvelle cotisation dans des situations tant de revenu surdéclaré que de revenu sous-déclaré. Cependant, la ministre était d’avis qu’elle ne possédait pas un tel pouvoir discrétionnaire relativement au revenu surdéclaré. Le contribuable a présenté une demande de contrôle judiciaire à la Cour fédérale pour qu’elle examine la décision de la ministre de ne pas procéder au redressement du revenu pour les années d’imposition 2009 et 2010.

La ministre a tout d’abord fait valoir que la CCI, et non la CF, était l’instance appropriée pour se prononcer sur cette question puisqu’elle portait sur un litige relatif à une cotisation. La CF a confirmé sa juridiction, parce que la question était de déterminer s’il était raisonnable de la part de la ministre d’avoir décidé qu’elle n’avait pas le pouvoir discrétionnaire d’établir une nouvelle cotisation pour les années d’imposition 2009 et 2010 en application du sous-alinéa 152(4)a)(i). Ce refus ne pouvait pas être porté en appel devant la CCI.

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Sur le fond, la CF a conclu que la décision n’était pas raisonnable parce que rien dans les raisons fournies au contribuable ou dans le dossier judiciaire n’indiquait que la ministre avait mené une quelconque analyse textuelle, contextuelle et de l’objet visé de la disposition applicable, comme l’a exigé la CSC dans Hypothèques Trustco Canada c. Canada (2005 CSC 54). Cependant, la CF a refusé de faire droit à la demande du contribuable d’exercer son pouvoir discrétionnaire dans l’interprétation du sous-alinéa 152(4)a)(i) et de donner des directives à la ministre. La Cour a plutôt annulé la décision et l’a renvoyée à la ministre pour qu’elle la réexamine. Puisqu’il est possible que le nouvel examen de la ministre donne lieu à un refus de redresser le revenu, le contribuable a interjeté la décision en appel devant la CAF.

La décision pourrait avoir une application dans le contexte de prix de transfert. Lorsque la ministre refuse de redresser en application du paragraphe 247(10) un revenu surdéclaré (redressement à la baisse) et n’établit pas d’avis de nouvelle cotisation, la CF peut être la cour appropriée pour examiner le refus. De plus, les contribuables devraient chercher à invoquer l’alinéa 152(4)a)(i) dans les situations où un revenu est surdéclaré à cause d’une présentation erronée des faits et qu’un redressement en vertu du paragraphe 247(10) est impossible parce que l’année est frappée de prescription.

Nathalie PerronBarsalou Lawson Rheault, Montréaln.perron@barsalou.ca

Referring Clients to Other ProfessionalsTax and estate-planning practitioners commonly receive requests from clients for referrals to other professionals—bankers, lawyers, accountants, investment professionals, and the like. Most practitioners readily comply with these requests as another form of client service, but the SCC’s decision in Salomon v. Matte-Thompson (2019 SCC 14) shows that referrals involve a professional liability risk—at least where common-sense boundaries on such referrals are not observed.

Mr. Salomon, a senior lawyer, practised in the areas of estate and succession planning. Mr. Salomon’s client, the plaintiff, wanted to invest in a way that preserved capital. In 2003, Mr. Salomon introduced the plaintiff to his personal financial adviser, Mr. Papadopoulos, who focused on offshore invest-ments, on the basis that one such offshore investment was “an excellent vehicle wherever security of capital is important.” The plaintiff ultimately invested millions of dollars in various investments offered by Mr. Papadopoulos.

Mr. Salomon repeatedly represented to the client that the investments were safe and, at times, appeared to vouch for the investments. Mr. Salomon also received payments from

Mr. Papadopoulos, who described those payments in one e-mail as “commissions.” Following the 2007 publication of an article critical of Mr. Papadopoulos’s investment vehicles, the plaintiff requested a redemption of all such investments. Unfortu-nately, it was revealed that Mr. Papadopoulos was running a Ponzi scheme (that is, money was simply being transferred among clients, without any real investment income), and the plaintiff incurred substantial losses.

The SCC found Mr. Salomon to be negligent and respon-sible to his client for the damages incurred. Does that mean practitioners should worry about making referrals? The facts in Salomon show that this was not a mere referral; there was an endorsement of the particular investments, and Mr. Salomon entered into a conflict of interest by taking a payment in any form from Mr. Papadopoulos. Codes of professional conduct governing lawyers may require a declaration of conflict of interest and independent legal advice when lawyers recom-mend an investment. That responsibility is undoubtedly heightened when the lawyer has a pecuniary interest in the investment, such as receipt of a commission.

The SCC expressed the following principle for professional liability in referrals:

Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in question.  .  .  . [L]awyers can refer their clients to other professionals or advi-sors so long as they discharge their professional obligations in so doing.

The Salomon decision is a useful supplement to the cases pertaining to tax practitioner liability, which includes the following areas: negligently providing erroneous procedural advice on real estate tax appeals (Glivar v. Noble (1985), 8 OAC 60 (CA)); negligently setting up a non-interest-bearing share-holder loan, which created a tax liability pursuant to subsection 15(2) (285614 Alberta Ltd. v. Burnet, Duckworth & Palmer, 1993 CanLII 7020 (ABQB)); and not structuring a sale transaction to use the capital gains exemption (Silver v. Morris, 1995 CanLII 4346 (NSCA)). The first two cases successfully established liability in negligence, but the last case did not.

Graham PurseMLT Aikins LLP, Reginagpurse@mltaikins.com

TCC Refuses To Grant Charter RemediesIn Brooks v. The Queen (2019 TCC 47; under appeal), the Crown brought a motion to strike the portions of the taxpayer’s notice of appeal pertaining to the conduct of CRA agents, violations of

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the taxpayer’s Charter rights, and requests to vacate reassess-ments owing to Charter violations. The TCC accepted this motion. It appears that, once again (as in Piersanti v. The Queen, 2013 TCC 226; aff’d 2014 FCA 243; and Bauer v. The Queen, 2016 TCC 136; aff’d 2018 FCA 62), the TCC continues to deny rem-edies under the Charter, despite jurisprudence from the SCC suggesting that courts like the TCC should provide such remedies.

According to the notice of appeal in Brooks, the taxpayer was the subject of both a civil audit and a criminal investiga-tion by the CRA, and the CRA used its audit powers to further a predominantly criminal investigation. The taxpayer claimed that this was a violation of his section 7 and 8 Charter rights, and therefore an appropriate remedy under section 24(1) of the Charter would be to vacate the assessment. The taxpayer also asked that the evidence obtained in violation of his Charter rights be excluded under section  24(2) of the Charter. The Crown sought to have these allegations, among others, struck from the notice of appeal.

The taxpayer lost on both counts. The court ruled that it was plain and obvious that the pleadings that related to CRA conduct should be struck because they had no reasonable possibility of success. The court also ruled that the taxpayer’s pleadings that challenged the admissibility of evidence obtained during the audit process should be struck because it was plain and obvious that the facts pleaded disclosed no Charter violations.

The court considered the applicability of R v. Conway (2010 SCC 22), which stands for the principle that lower courts and administrative tribunals that have the jurisdiction to deter-mine Charter issues connected to the issues that are properly before them also have the jurisdiction to grant a remedy under section 24(1) of the Charter. The TCC held that its remedies are limited to those provided by section 171 of the ITA, and that Conway does not expand them. Although the court rec-ognized that it had the power to vacate an assessment in situations where the Charter was breached, as the TCC (upheld by the FCA) had done in Canada v. O’Neill Motors Ltd. (1998 CanLII 9070 (FCA)), it found that the situation at hand was factually different.

With all due respect to the TCC, the test to strike pleadings mandates that the court assume the pleaded facts to be true; and if one assumes that the CRA used its audit powers to further a predominantly criminal investigation, with the aud-itor acting as an agent of the enforcement division to collect information, then the taxpayer’s Charter rights had been breached (see R v. Jarvis, 2002 SCC 73, at paragraph 94). There-fore, it is incorrect to say that “it is plain and obvious that the facts pleaded disclose no Charter violations.” The only way to determine whether the taxpayer’s Charter rights were violated is to have a trial.

Brooks seems to imply that the only way that a taxpayer could get a tax assessment vacated under section 24(1) of the

Charter would be to bring an action in a superior court to get a ruling that there was a Charter breach, and then bring an-other action in the TCC to vacate the tax assessment. But a taxpayer should not be required to bifurcate proceedings in this way in order to obtain a Charter remedy; tribunals (and by extension lower courts) should provide the Charter remedy directly: see Conway; Quebec (Commission des normes, de l’équité, de la santé et de la sécurité du travail) v. Caron (2018 SCC 3, at paragraph 95); and R v. Bird (2019 SCC 7, at paragraph 47).

Josh Schmidt and Darryl WaySchmidt & Gilmour Tax Law LLP, Vancouverjschmidt@schmidtgilmour.comdway@schmidtgilmour.com

CRA Cannot Require Oral InterviewsIn Canada (National Revenue) v. Cameco Corporation (2019 FCA 67), the FCA confirmed the FC’s decision (2017 FC 763) that the CRA cannot require a taxpayer to give oral answers to questions. Therefore, taxpayers can decide if it is in their inter-est to cooperate with this frequent request. However, the FCA remarked that it was open to the minister to draw an inference from a refusal to answer oral questions; an uncooperative disposition may lead to incorrect assumptions being drawn. Taxpayers must weigh this concern against the possible prejudicial effects that an oral examination may have on an audit.

The taxpayer was one of the world’s largest uranium produ-cers, and its transactions with foreign affiliates were the subject of intense transfer-pricing scrutiny by the CRA. Pursu-ant to her statutory power to “inspect, audit or examine” the books and records of a taxpayer pursuant to paragraph 231.1(1)(a), the minister sought oral interviews with more than 25  people employed by the taxpayer and its affiliates, including employees of non-resident affiliates. The taxpayer refused the request, but offered written interviews.

At the FC, the minister sought a compliance order under section  231.7. The taxpayer contended that the interviews would bear negatively on ongoing tax litigation by the taxpayer for separate taxation years, and that the CRA was seeking to circumvent the established procedures for oral examination in the courts. The FC refused the minister’s request on the basis that the scope of the request was disproportionate to the CRA’s audit objectives.

At the FCA, a majority dismissed the minister’s further appeal. The court concluded that the general audit powers in section 231.1 did not encompass an ability to compel the production of witnesses for oral examination. The text of para-graph 231.1(1)(a) contains no reference to oral questioning, and in other contexts where Parliament intended for oral questioning to be within the powers of a government author-ity, it referenced that ability explicitly. A specific power to

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require assistance of persons associated with the taxpayer in paragraph 231.1(1)(d) relates only to the location and source of books and records, and not to open-ended discovery related to a taxpayer’s liability. Finally, the court noted that the former version of paragraph  231.1(1)(a) specifically used the term “orally” in connection with audit powers, and meaning must be given to the fact that that term was legislatively excised in the present provision. A concurring judgment by Woods  J reached the same conclusion, but on the grounds provided by the FC.

The majority made several additional comments. First, whether the minister approaches the court with “clean hands” is of no relevance to whether a compliance order should be granted. It is open to a taxpayer to argue that such an order represents an abuse of process, but the past cooperation of a taxpayer coupled with a perceived aggressiveness on the min-ister’s part is no defence to an application for a compliance order. Second, potential prejudice to separate ongoing or pro-spective litigation is of no relevance to the exercise of audit powers. Whether evidence unveiled through an audit is admis-sible in litigation is a matter to be dealt with by the presiding TCC judge. Third, objections to the vagueness of the minister’s requests were not considered relevant because they were pre-mature and speculative. This suggests that implementation concerns should be clearly articulated when opposing a com-pliance order.

Ashvin SinghFelesky Flynn LLP, Edmontonasingh@felesky.com

Fairness and the Onus of ProofThe SCC in Hickman Motors Ltd v. Canada ([1997] 2 SCR 336) established that the taxpayer generally bears the onus of proof. There are two key exceptions to this rule: gross negligence penalties and when fairness demands. The latter exception was initially relatively broad but was applied narrowly in Monsell v. The Queen (2019 TCC 5).

Since Hickman, the courts have considered the issue of onus in multiple cases. In Canada v. Anchor Pointe Energy Ltd. (2003 FCA 294), the FCA explained that the taxpayer bears the initial burden of proof because Canada has a self-reporting system premised on the axiom that taxpayers understand their own businesses best. From this it follows that if there is dis-agreement between the minister and the taxpayer, the taxpayer has more and better information than the minister.

However, if a given taxpayer does not actually understand the assessed business, the minister may have the information advantage. This can arise in the context of joint liability assess-ments made under subsection 160(1) of the ITA and section 325 of the ETA, and director’s liability assessments made under

section 227.1 of the ITA and section 323 of the ETA. In such cases, the taxpayer may not have been actively involved with the corporation that was the subject of the underlying assessment.

In Gestion Yvan Drouin Inc. v. The Queen (2001 DTC 72 (TCC)), the taxpayer appealed an assessment made under ITA subsection 160(1). In finding for the taxpayer, the TCC estab-lished that “the onus of providing prima facie evidence of the tax liability where an assessment has been made under sub-section 160(1) of the Act generally falls on the Minister.”

Monsell demonstrates that, in the time since Gestion, the demands of fairness have been narrowed. In Monsell, Tammy Anne Monsell and Peter William Molander (“the appellants”) were assessed under section 160 in respect of the tax debt of Newgate Holdings Ltd., a corporation not at arm’s length from the appellants. Both the underlying assessment of Newgate and the section 160 assessment of the appellants related to Newgate’s 2005, 2006, and 2007 taxation years. The appellants argued that the onus should shift to the minister, since all the documents and information relating to the assessment of Newgate were in the possession of the minister.

Mr.  Molander’s mother, who died in 2010, was the sole shareholder of Newgate. Mr. Molander had signing authority on behalf of Newgate, though this was limited to cheque sign-ing. He was involved only in Newgate’s marketing, and had no role in the administration, accounting, or preparing of tax returns for Newgate. Following the receipt of the section 160 assessment in respect of the 2005 and 2006 taxation years, Mr. Molander made efforts to locate the relevant tax records and submitted an access to information request to the CRA. The request was unsuccessful, and it revealed that the CRA had lost or destroyed Newgate’s records.

On the basis of these facts, the TCC found that the appellants had no control of or access to Newgate’s records, and since the documents were no longer available, the appellants were not in a position to challenge the correctness of the underlying reassessments. Accordingly, the TCC held that for the 2005 and 2006 taxation years “it would be unfair to place the onus on the appellants.” Yet this judgment was circumscribed; in regard to the assessment of the 2007 taxation year, the TCC found that the appellants had access to the same information as the minister, and that the onus for that year therefore remained on the taxpayers.

Thus, although Gestion established that the minister bears the onus for section 160 assessments, Monsell narrowed this, shifting the onus only where the taxpayer could not access the relevant records because they had been lost by the CRA.

Kathryn WalkerFasken Martineau DuMoulin LLP, Torontokwalker@fasken.com

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Reaffirming the Sham DoctrineIn Lee v. The Queen (2018 TCC 230), the TCC reaffirmed the limited scope of the sham doctrine and drew a line between sham and acceptable tax planning. In regard to sham, the applicable test remains: did the parties factually misrepresent their legal rights and obligations?

The tax planning challenged in Lee is commonly referred to as the “Quebec truffle.” The planning generally involved a Quebec-resident trust with non-Quebec-resident beneficiaries. It exploited the interplay between the then-existing provisions of the Income Tax Act and the Taxation Act (Quebec) so that income distributed to non-Quebec-resident beneficiaries was taxed federally in the trust without any payment of provin-cial tax. This planning was eliminated after the events in this case by a 2006 change in Quebec law.

The appellant in Lee settled a Quebec spousal trust with his spouse, a resident of British Columbia, as the sole beneficiary. During the relevant taxation years, all income received by the trust was distributed to its BC-resident beneficiary. The trust elected to be taxed federally on such distributed income but did not make the equivalent provincial election for Quebec tax purposes. Although the trust received the federal abatement, no provincial tax was imposed on the distributed income because the beneficiary was not a resident of Quebec.

The CRA reassessed the settlor for the income reported by the trust on the basis that either the trust or the transfer of property to the trust was a sham or, alternatively, that the trust was not properly constituted under Quebec law. Owen J dis-agreed with the Crown’s arguments and concluded that neither the establishment of the trust nor the transfer of prop-erty to the trust was a sham. Moreover, he held that the trust was validly and effectively created under the laws of Quebec.

In reaching his conclusion, Owen J revisited the doctrine of sham, reiterated the requirement of deceit, and stated that “[t]o be a sham, the factual presentation of the legal rights and obligations of the parties to the sham must be different from what the parties know those legal rights and obligations, if any, to be.” Ultimately, Owen J found that there was no deceit regarding the legal relationships created under Quebec law and, more importantly, he clarified that tax motivation “is not in and of itself evidence of a sham.”

First, Owen J said, “[c]reating legal (or equitable) relation-ships to give effect to a tax plan is not the perpetration of a sham.” For example, a trustee’s decision to follow predeter-mined tax planning does not necessarily mean that the trust relationship is a sham. Transactions that accurately reflected the intention of the parties cannot and should not be dis-regarded under the doctrine of sham simply because they were tax-motivated.

Second, distinctions exist between a sham, an ineffective transaction, and an avoidance transaction—the first involves deceit and warrants the court’s intervention; the second in-

volves poor execution; and the third is an intentional minimi-zation of a taxpayer’s tax burden, which warrants interference from the court only where the general anti-avoidance rule is invoked.

Lee follows hot on the heels of Owen J’s decision in Cameco Corporation v. The Queen (2018 TCC 195), where he chastised the Crown for misunderstanding the sham doctrine. Cameco and Lee are welcome decisions for taxpayers because they provide further guidance on the application of the sham doc-trine and reaffirm that sham requires deceit.

Julia Qian Wang and Kalev TammBlake Cassels & Graydon LLP, Montrealjulia.wang@blakes.comkalev.tamm@blakes.com

Réaffirmation de la doctrine du trompe-l’œilDans Lee v. The Queen (2018 TCC 230), la Cour canadienne de l’impôt a réaffirmé la portée limitée de la doctrine du trompe-l’œil et a établi la distinction entre un trompe-l’œil et la planification fiscale acceptable. En matière du trompe-l’œil, le critère juridique demeure le suivant : dans les faits, les parties ont-elles représenté faussement leurs droits et obligations juridiques?

La stratégie de planification fiscale examinée dans Lee faisait appel à des opérations interprovinciales et était surnommée « Quebec Truffle ». Cette stratégie, qui a été contrecarrée par un changement à la législation québécoise apporté en 2006, soit après le moment des faits en cause dans cette affaire, impliquait généralement une fiducie résidente au Québec dont les bénéficiaires résidaient à l’extérieur du Québec. Elle tirait avantage de l’interaction entre les dispositions de la Loi de l’impôt sur le revenu (Canada) et de la Loi sur les impôts (Québec) qui étaient en vigueur à cette époque pour faire en sorte que le revenu distribué aux bénéficiaires ne résidant pas au Québec soit imposé dans la fiducie au fédéral seulement, sans aucun paiement d’impôt au niveau provincial.

L’appelant dans Lee a constitué une fiducie de conjoint au seul bénéfice de son épouse, une résidente de la Colombie-Britannique. Lors des années d’imposition visées, tout revenu reçu par la fiducie a été distribué à sa bénéficiaire résidente de la Colombie-Britannique. La fiducie a fait le choix d’être imposée au fédéral sur le revenu ainsi distribué, mais n’a pas fait le choix équivalent aux fins de l’impôt du Québec. Bien que la fiducie ait profité de l’abattement fiscal au fédéral, aucun impôt provincial n’a été exigé à l’égard du revenu distribué, car la bénéficiaire n’était pas une résidente du Québec.

L’ARC a établi une nouvelle cotisation à l’égard du constituant pour lui attribuer le revenu de la fiducie, au

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motif que la fiducie ou le transfert de biens constituaient un trompe-l’œil, ou, subsidiairement, que la fiducie n’avait pas été constituée en bonne et due forme en vertu du Code civil du Québec. Le juge Owen a rejeté les arguments de la Couronne, concluant que ni la constitution de la fiducie ni le transfert de biens à la fiducie ne constituaient un trompe-l’œil, et que la fiducie avait été constituée conformément aux lois du Québec.

Pour parvenir à cette conclusion, le juge Owen a revisité la doctrine du trompe-l’œil en réitérant que cette doctrine nécessite un élément de tromperie et en précisant que le trompe-l’œil requiert que la présentation factuelle par les parties de leurs droits et obligations juridiques soit pertinemment différente de ce qu’elle est réellement. Le juge Owen a finalement déterminé qu’il n’y avait pas eu tromperie en ce qui concerne les relations juridiques créées en vertu des lois québécoises. Plus important encore, le juge Owen a clarifié que l’existence d’un objectif fiscal ne démontre pas en elle-même un trompe-l’œil.

Pour commencer, comme le juge Owen l’a indiqué : « [traduction non officielle] la création de relations juridiques (ou de relations d’équité) pour mettre en œuvre des stratégies de planification fiscale ne constitue pas un trompe-l’œil. » À titre d’exemple, la décision d’un fiduciaire d’appliquer une stratégie de planification fiscale prédéterminée ne signifie pas nécessairement que la relation entre le fiduciaire et la fiducie est un trompe-l’œil. Les opérations qui reflètent correctement l’intention des parties ne peuvent pas — et ne doivent pas — être ignorées en vertu de la doctrine du trompe-l’œil simplement parce qu’elles comportent des objectifs fiscaux.

De plus, il existe des distinctions entre un trompe-l’œil, une opération sans effet et une opération d’évitement : le premier requiert un élément de tromperie et justifie l’intervention du tribunal; le second implique une exécution maladroite ou ineffective; et le troisième correspond à une réduction intentionnelle du fardeau fiscal d’un contribuable, qui justifie uniquement l’intervention du tribunal lorsque la règle générale anti-évitement est invoquée.

Lee fait suite à une autre décision notable du juge Owen, Cameco Corporation v. The Queen (2018 TCC 195), où il réprimande la Couronne pour sa compréhension erronée de la doctrine du trompe-l’œil. Les affaires Lee et Cameco Corporation sont accueillies favorablement par les contribuables, car elles fournissent des directives supplémentaires sur l’application de la doctrine du trompe-l’œil et confirment qu’un élément de tromperie est requis.

Julia Qian Wang et Kalev TammBlake Cassels & Graydon S.E.N.C.R.L./s.r.l., Montréaljulia.wang@blakes.comkalev.tamm@blakes.com

Credit Card Rewards Not Related to Spending: Taxable?The CRA has long held the position that credit card rewards based on an amount spent are discounts, not income (unless they are rewards received personally as a result of spending on a corporate credit card). But what about a reward or bonus for simply opening an account, or for referring a friend who opens a new account? Clearly, the receipt of such rewards increases wealth and thus is income in an economic sense, suggesting a higher ability to pay tax. These amounts are tax-able and subject to third-party reporting in the United States. The Canadian case is less clear, and probably depends on the specific facts of the taxpayer’s situation, but it leans toward non-taxable status.

A New York Times article of February 22, 2019 notes that US credit card issuers paying such bonuses (for example, Amer-ican Express) issue IRS form 1099-MISC to those who receive more than US $600 in rewards. The issuers appear to be com-plying with a US Tax Court decision, which held that the value of an airline ticket bought with frequent flier miles that were received as a premium in exchange for opening a bank account must be included in income (Shankar and Trivedi v. Commis-sioner of Internal Revenue, 143 TC no. 5, August 26, 2014).

In Canada, no specific guidance on this issue can be found in the statutes, case law, or CRA opinions. The best argument for taxability is that the activity of generating these rewards is a business, which would be more persuasive if the amounts were large (for example, above the US threshold) and recurring; this is more likely apply to referral fees, rather than to account-opening fees. This distinction of business versus non-business income is clearly present in Income Tax Folio S3-F9-C1 (“Lot-tery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime”), at paragraph 1.26. In essence, a prize or other award received by a person for being at or participating in an Internet, radio, or television program is generally not included in income unless the person is a professional actor, entertainer, or celebrity receiving an appearance fee (in which case it could be business income or employment income).

One argument for non-taxability is that the amount is a windfall (The Queen v. Cranswick, [1982] CTC 69, 82 DTC 6073 (FCA), and paragraph 1.2 of the Folio S3-F9-C1). However, one of the usual tests for being a windfall is that the taxpayer had no enforceable claim to the payment, and that determination would depend on the facts: was there a clear promise of a reward, and perhaps of a specific amount, or was the reward given gratuitously?

Another argument for non-taxability is that paragraph 3(a) of the Act states explicitly that a taxpayer’s income for a year is all income from a source, and rewards do not fit under any of the sources enumerated in section 3 (except possibly a busi-ness, as noted above). Rewards also do not fit any of the amounts

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two points were at issue in the appeal. (The BCCA never ad-dressed the fourth point, the question of malice, because it unanimously concluded that there was reasonable and prob-able cause for the prosecution.) As a result, the BCSC’s decision was overturned and the underlying action against the CRA was dismissed.

Punnett J, for the BCSC, considered that the CRA needed to be able to establish the mechanics of how the Samaroos evaded taxes before bringing charges of tax evasion. Although they had a theory that some cash register tapes showing sales for certain shifts were not provided to the bookkeeper, it was known that the evidence for this theory was problematic, and it was ultimately not proven in court. As a result, Punnett  J concluded that there was no reasonable and probable cause for prosecution.

In the view of the BCCA, this was a fatal error in his ap-preciation of the overt acts (actus reus) required for the offence of tax evasion. It is not necessary to prove the mechanics of tax evasion in order to have reasonable and probable cause to bring charges: “What matters is the fact that taxable income is intentionally not reported” (paragraph 58). The BCCA then performed its own analysis of whether reasonable and prob-able cause existed prior to the Samaroos’ trial (that is, without having the benefit of any findings of credibility on the part of the BC Provincial Court judge) and determined that such cause did indeed exist, based on the circumstantial evidence available at the time.

This case serves to highlight the present curious state of Canadian law. Consider these facts: a prosecution may be undertaken and motivated by malice or by a primary purpose other than that of carrying the law into effect; exculpatory evi-dence may be suppressed by the investigator; and a taxpayer may eventually be found not guilty of the charges levied. Yet, such a taxpayer seemingly has no recourse against those who brought the charges based on improper motives and sup-pressed evidence, so long as other (possibly circumstantial) facts suggest that reasonable and probable cause existed at the time charges were brought.

Joel ScheuermanBCF LLP, MontrealJoel.Scheuerman@bcf.ca

Affaire Samaroo : Renversement du verdict de poursuites abusivesDans Samaroo v. Canada Revenue Agency (2019 BCCA 113), la Cour d’appel de la Colombie-Britannique a infirmé la décision de la Cour suprême de la Colombie-Britannique qui ordonnait à l’ARC de dédommager un couple de la Colombie-Britannique, les Samaroo, d’un montant de près de 1,7 million de dollars. Ceci représentait des dommages-intérêts compensatoires, majorés et punitifs pour avoir

named in part I, division B, subdivision d (sections 56 to 59.1), for which the subdivision title is “other sources of income.” They could be an unenumerated source of income, but the SCC has been reluctant to assign anything to this category (see Fries, [1990] 2 SCR 1322; Schwartz, [1996] 1 SCR 254; and Ben-jamin Alarie, “The Taxation of Winnings from Poker and Other Gambling Activities in Canada,” a 2011 article in the Canadian Tax Journal). Alarie notes that the US Internal Revenue Code uses an accretion concept of income, which generally taxes gains regardless of whether a gain has a “source” in the Can-adian sense. Hence the US courts might be more willing to tax these reward amounts than Canadian courts would be.

Jin WenGrant Thornton LLP, Torontojin.wen@ca.gt.com

Samaroo: Malicious Prosecution Finding OverturnedIn Samaroo v. Canada Revenue Agency (2019 BCCA 113), the BC Court of Appeal has overturned the BC Supreme Court’s decision ordering the CRA to pay a BC couple, the Samaroos, nearly $1.7 million in compensatory, aggravated, and punitive damages for maliciously prosecuting them for tax evasion (Samaroo v. Canada Revenue Agency, 2018 BCSC 324). The key lesson is that there can be reasonable and probable cause for a prosecution for tax evasion even in the absence of proof of how the evasion occurred.

The Samaroos operated a restaurant and nightclub in Brit-ish Columbia. The CRA charged them with tax evasion, but they were acquitted by the BC Provincial Court, largely on a finding that Mr.  Samaroo was credible (R v. Samaroo, 2011 BCPC 0503). The Samaroos then sued the CRA for the tort of malicious prosecution.

In Miazga v. Kvello Estate (2009 SCC 51), the SCC found that this tort requires the following elements (in the case at hand, the CRA was the defendant and the Samaroos were the plaintiffs):

1) the defendant must have initiated or continued the prosecution;

2) the prosecution must have terminated in the plaintiffs’ favour;

3) the prosecution must have been undertaken without reasonable and probable cause; and

4) the prosecution must have been motivated by malice or by a primary purpose other than that of carrying the law into effect.

At trial (for the malicious prosecution action), it was found that all of these points were satisfied. (For further details, see “CRA Ordered To Pay $1.7 Million in Damages for Malicious Prosecution,” Canadian Tax Focus, May 2018.) Only the last

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criminel. En conséquence, le juge Punnett a conclu qu’il n’y avait pas de motifs raisonnables et probables d’intenter une poursuite.

Selon la Cour d’appel, le juge en première instance a erré dans son appréciation des actes matériels (actus reus) essentiels à l’infraction d’évasion fiscale. Il n’est pas nécessaire que l’ARC ait la preuve des mécanismes utilisés pour effectuer de l’évasion fiscale pour avoir des motifs raisonnables et probables de porter des accusations : « [traduction] ce qui importe, c’est l’omission volontaire de déclarer un revenu imposable » (paragraphe 58). La Cour d’appel a ensuite procédé à sa propre analyse pour déterminer s’il existait des motifs raisonnables et probables avant le procès des Samaroo (c’est-à-dire avant que le juge de la Cour provinciale de la Colombie-Britannique se prononce sur la crédibilité de M. Samaroo) et a déterminé qu’il existait bel et bien de tels motifs, selon les preuves circonstancielles disponibles à l’époque.

Cette affaire met en lumière le curieux état du droit canadien à l’heure actuelle. Considérez le scénario suivant : une poursuite pourrait être intentée contre un contribuable avec une intention malveillante ou à une autre fin que celle de l’application de la loi. L’enquêteur pourrait supprimer des preuves disculpatoires, et le contribuable pourrait éventuellement être déclaré non coupable des accusations portées. Or, il semble que dans un tel scénario, le contribuable ne disposerait d’aucun recours contre les personnes ou organisations qui auraient porté des accusations à son endroit pour des motifs illégitimes et qui auraient supprimé des preuves, dans la mesure où d’autres faits (y compris de possibles preuves circonstancielles) suggéreraient qu’il existait des motifs raisonnables et probables au moment où les accusations ont été portées.

Joel ScheuermanBCF s.e.n.c.r.l., MontréalJoel.Scheuerman@bcf.ca

intenté des poursuites abusives pour évasion fiscale contre le couple (Samaroo v. Canada Revenue Agency, 2018 BCSC 324). Selon cet arrêt, l’ARC peut avoir des motifs raisonnables et probables d’intenter une poursuite pour évasion fiscale et ce même en l’absence de preuves quant aux mécanismes d’évasion fiscale utilisés.

Les Samaroo exploitaient un restaurant et un club en Colombie-Britannique. L’ARC les a accusés d’évasion fiscale, mais ils ont été acquittés par la Cour provinciale de la Colombie-Britannique, qui a fondé sa décision en grande partie sur la crédibilité du témoignage de M. Samaroo (R v. Samaroo, 2011 BCPC 0503). Suite à cet acquittement, les Samaroo ont intenté une action pour poursuites abusives contre l’ARC.

Selon la CSC dans l’arrêt Miazga c. Kvello (Succession) (2009 CSC 51), pour obtenir gain de cause dans une action pour poursuites abusives, le demandeur doit établir que les critères suivants sont remplis (dans l’affaire Samaroo, l’ARC était le défendeur et les Samaroo étaient les demandeurs) :

1) le défendeur a engagé ou continué la poursuite;2) la poursuite a débouché sur une décision favorable

au demandeur;3) la poursuite a été intentée sans motifs raisonnables

et probables; et4) la poursuite a été engagée dans une intention

malveillante ou essentiellement à une autre fin que celle de l’application de la loi.

Dans l’affaire Samaroo, lors du procès pour poursuites abusives, la Cour suprême de la Colombie-Britannique avait conclu que tous ces critères étaient satisfaits. (Pour obtenir plus de détails, consulter « L’ARC tenue de verser 1,7 millions de dollars en dommages-intérêts pour poursuite abusive », Canadian Tax Focus, mai 2018.) Devant la Cour d’appel de la Colombie-Britannique, seuls les deux derniers critères étaient en litige. (La Cour d’appel ne s’est pas prononcée sur le quatrième critère, celui de l’intention malveillante, ayant conclu à l’unanimité qu’il existait des motifs raisonnables et probables d’intenter une poursuite.) La Cour d’appel a infirmé la décision de première instance et l’action sous-jacente contre l’ARC a été rejetée pour les raisons suivantes.

En première instance, le juge Punnett de la Cour suprême de la Colombie-Britannique estimait que l’ARC devait être en mesure de déterminer les mécanismes d’évasion fiscale utilisés par les Samaroo avant de porter des accusations d’évasion fiscale à leur endroit. En effet, malgré le fait que l’ARC avait une théorie portant sur le mécanisme d’évasion (selon laquelle les rubans de caisse enregistreuse de certains quarts de travail n’étaient pas remis au comptable, ce qui avait pour effet de masquer certaines ventes), elle savait qu’il y avait des problèmes sérieux quant à leur preuve à cet égard au dossier. Cette théorie n’a finalement pas été retenue par la Cour lors du procès

21Volume 9, Number 2 May 2019

Potential authors are encouraged to send ideas or original submissions to the editor of Canadian Tax Focus, Alan Macnaughton (amacnaughton@uwaterloo.ca), or to one of the contributing editors listed below. Content must not have been published or submitted elsewhere. Before submitting material to Canadian Tax Focus, authors should ensure that their firms’ applicable review policies and requirements for articles bearing the firm’s name have been met.

For each issue, contributing editors from Young Practitioners chapters across Canada suggest topics and assist authors in developing ideas for publication. For the May 2019 issue, we thank Timothy Fitzsimmons, editorial adviser, and the contributing editors shown in the list below. In Montreal, an editorial board works  together in preparing articles. We thank the board chair, Olivier Fournier (olfournier@deloittetaxlaw.ca), and Raphael Barchichat (rbarchichat@psbboisjoli.ca); Justine Morin (justinemorin@kpmg.ca); Angelo Discepola (adiscepola@mccarthy.ca); Kareen Tea (ktea@bdo.ca); Alexandre Papale (apapale@morencyavocats.com); François Desjardins (desjardins.francois@rcgt.com); Nathalie Perron (n.perron@barsalou.ca); and Jonathan Lafrance (jonathan.lafrance@nortonrosefulbright.com).

Halifax:• Bryan Whalen (bpwhalen@collinsbarrow.com)

Ottawa:• Mark Dumalski (mdumalski@deloitte.ca)• Nick Korhonen (nick.korhonen@mnp.ca)

Toronto:• Amanda Laren (alaren@robapp.com)• Melanie Kneis (melanie.kneis@rbc.com)

Winnipeg:• Nora Fien (nfien@FillmoreRiley.com)• Ari Hanson (ahanson@FillmoreRiley.com)

Saskatoon:• Byron Bitz (bbitz@bbllp.ca)

Edmonton:• Tim Kirby (tkirby@felesky.com)

Calgary:• Marshall Haughey (HaugheyM@bennettjones.com)• Robert Myroon (robert.myroon@bluearth.ca)

Vancouver:• Sam Liang (sam@taxlegal.ca)

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ISSN 1925-6817 (Online). Published quarterly.